Market Review

The FTSE/JSE All Share Index (ALSI) returned 1.9% (5.1% incl. dividends) for the year driven predominately by the large cap industrial multinationals such as SABMiller (55%), British American Tobacco (38%), Naspers (+40%), Steinhoff International (32%) and Mondi (62%). Financials returned 3.9% with life insurers (+7%) and listed property (+8%) outperforming banks (-13%). Slower growth in China, a strong US Dollar and excess supply of key commodities remain a headwind for commodity prices. Against this backdrop, commodity prices continued to fall with oil (-38%), gold (-10%), platinum (-28%) and copper (-26%) weighing heavily on resource stocks which underperformed the market for a sixth consecutive year returning -37%. The rand weakened 34% against the US Dollar, falling sharply following President Jacob Zuma’s decision to replace the respected Finance Minister Nene with lesser known David van Rooyen with no explanation offered. The MSCI World and Emerging Market indices (USD) returned -0.3% and -14.6% respectively, while in the U.S. the S&P 500 gained 1.4%. In Europe, the German DAX 30 dropped 1.6% and the French CAC 40 index rose 0.5% in US Dollars. In Asia, the Hang Seng fell 3.9%, the Japanese Nikkei gained 10.6% and MSCI China dropped 7.6% in US Dollars.

Fund Performance

The fund returned 3.4% over the quarter outperforming the FTSE/JSE SWIX which returned 1.3%. The fund returned -1.5% for the year underperforming the SWIX which returned 3.62%. The largest detractors from performance were overweight positions in Anglo American, Anglo Platinum, Northam Platinum and Howden and underweights in Naspers and SABMiller. There were good contributions from British American Tobacco, Truworths, Tiger Brands, Netease and Valeant Pharmaceuticals which added positively to performance.
Outlook and strategy

As we begin 2016, the risks both locally and internationally remains firmly to the downside. The sell-off of the rand and SA bonds following the debacle surrounding the replacement of Finance Minister Nene does not bode well for South Africa. The probability of a credit rating downgrade to non-investment grade status remains extremely high. The risks of an economic down-cycle looms large as rand weakness puts a handbrake on growth, inflation accelerates and interest rates rise more sharply than anticipated. This is not a good picture for domestic interest-rate sensitive stocks but valuations have now become very compelling in some cases. We remain mindful of the risks and continue to apply our minds carefully but still come back to the same conclusion that selected financial stocks offer the prospect of mid-to-upper single digit real returns under conservative assumptions with limited downside from current prices. As a consequence, we have been net buyers of financial stocks recently. We remain fully invested offshore and continue holding relatively high cash balances as our preference is to have capital available to put to work in times of fear and panic.

We don’t know what 2016 will hold - the crystal ball is foggy at best - but feel that downside risks evident a year ago have now begun to be discounted. As ever, our approach remains measured and focused on finding businesses priced below our estimate of intrinsic value that offer compelling asymmetric payoffs - limited downside but significantly higher upside potential.